Economics Chapter 6 Markets
Price Discrimination (does not have to be a monopoly)
1. Price maker which is why there is a downward sloping demand curve. 2. Seller must be able to segment the market by distinguishing between consumers willing to pay different prices. 3. It must be impossible or too costly for customers to engage in arbitrage (buying a product at a low price and selling it for more.) (books in college). (selling books to book store for little money)
market structure
A classification system for the key traits or a market, including the number of firms (sellers), similarity of the products they sell, and the ease of entry into and exit from the market. (price maker or price taker?)
Mutual interdependence
A condition in which an action by one firm may cause a reaction from other firms.
monopolistic competition
A market structure charactered by many sellers, a differentiated product, and easy market entry and exit.
For graphing parts of perfect competition look at google doc
Chapter 6
Barrier to entry
Any obstacle that makes it difficult for a new firm to enter a market.
Which markets are the middle ground
Oligopoly and Monopolistic Competition
break-even point.
The point at which marginal cost equals average total cost (MC = ATC)
Product differentiation
The process of creating real or apparent differences between goods and services.
Nash Equilibrium
When each player plays their best strategy assuming that the other player will not change their strategy.
Collusion
When two or more competitors agree to fix prices or engage in activities to restrict competition in the industry. In the United States this is usually done secretly because it is illegal.
marginal revenue
((how much you sell a unit of product for) The change in total revenue from the scale of one additional unit of output. (constant) (straight line in perfect competitive market) Marginal revenue is the additional revenue generated from selling one more unit of output. The formula is the change in total revenue divided by the change in quantity or output. Total revenue is the price times quantity and since the price is constant for each good sold, the marginal revenue in a purely competitive market is simply the price of the good. Thus in pure competition, the demand is equal to the marginal revenue which is also equal to the average revenue. For pure competition, to solve graphically, we combine our costs curves with the demand curve, which is also our marginal revenue curve and find the quantity where marginal revenue equals the marginal cost.
marginal cost
(TC2 - TC1/ (TP2 - TP1)
Marginal revenue for monopiles/ profit
Marginal revenue is rather inelastic (because monopolies make the prices) Area between demand and ATC = profit The quantity stays the same (same as perfect competitive market) (maximize profit) Where you hit the demand curve is what price you are selling a product at. AS YOU MOVE DOWN THE DEMAND CURVE YOU MAKE LESS AND LESS MONEY Anywhere above the ATC is profit but to the right of the maximization profit point You make money in this triangle just a lot less of it Profit is anywhere of ATC (just a rectangle of it cause the rest is a tiny bit)
Profit
total revenue minus total cost TR (price X quantity) - TC (ATC below or above MR point X quantity) If TC > TR = profit loss, TR > TC = profit, TR = TC = 0 = break even Area difference determine if there is a profit loss or not
Network good
value of the product rises as the total number of users rise. EX: Social media (MORE PEOPLE TO VIEW ADS)
When does a monopoly maximizes product
when marginal cost = marginal revenue (same as perfect competition)
When do you NOT want to shut down production?
(above AVC) Recall that in the short run, firms have fixed costs that must be paid regardless. Thus if a firm can cover its variable costs and still have revenue to contribute to its fixed costs, it loses less money by producing than by shutting down. Our rule of producing where marginal revenue equals marginal cost still applies, but since price is below ATC the firm's loss is represented by the area below ATC and above the demand curve. Even though the firm continues to produce, the amount of production is less than when the price was higher.
Oligopoly Characteristics
-Few sellers: Big 3 or 4 EITHER OR (identical or differentiated products) -Homogenous products: Steel is steel, oil is oil (don't know where it was from) -Differentiated product: certain brands -Difficult entry into the market: Patent rights, legal barriers, exclusive financial requirements. -Price Maker: Set the price of the product. -Evaluation of an Oligopoly 1. Higher price than perfect competition and has smaller number of firms. 2. Spend money on advertising, product differentiation, and other forms of nonprice competition. 3. Long Run they can turn a profit (earn profit) because it is difficult for people to enter the industry. EX: oil, steel, auto
Characteristics of a perfect competitive market
-Large number of firms (many sellers): No single firm can influence the market price. -Homogenous product (identical products): Buyers are indifferent to what they are buying. Products are similar. ----EX: Everyone on a beach selling the same 10 dollar beach towel (same length, color build). -Very easy entry and exit: Resources can completely mobile freely enter or exit the market. -Price taker (take the price given to you) EX: agriculture, stocks
Price gouging
-Monopolies gouge consumers by charging a higher price on goods and services. -Monopolies restrict output in order to maximize profits. Reduce output so they can charge a higher price. -Monopoly alters the distribution of income in favor of monopolies. -Technology changes at a greater rate because of monopolies. (people working harder to make their product better than the monopolies)
Monopoly characteristics
-One seller = Monopoly Complete opposite of a perfect competition -Single seller: Single firm in the industry. ---EX: Only gas station in town, Cable TV, only hot dog stand in football stadium -Unique product: No close substitutes. (at that time ------------------------------- -Impossible entry: High barriers prevent other competition into the market. -PRICE MAKER (don't have to take price made my supply and demand) -Marginal revenue is rather inelastic (because monopolies make the prices) Average total cost to demand = profit (use point where MC = MR) EX: Public utilities (cable), first-class
-Barriers to entry (prevent you from getting into monopoly market)
-Ownership of a vital source: ---EX: Alco had all the bauxite after WWII. No one else could make aluminum. NBA, MLB- best platers and stadiums. (another business just can't compete) -Legal barriers: Government gives one permit, license, or franchise to a company and bars anyone else coming on. EX: US postal survive, liquor stores, Minnesota State Lottery -Economies of scale: Due to a business being the only one in the market it can set its costs low and still be efficient. Now no one will enter because they can't compete at the low cost. (Natural Monopoly). Monopsony power is when a company buys so much of a product that it can reduce its per-unit costs. --- EX: Rockefeller makes deal with railroads for them to only ship his oil.
Monopolistic Competition Characteristics
-Price maker: Set the price of the product (not much as a monopoly tho) ---Many small sellers: sellers believe they can independently set their own prices without fear that competition will react ---Differentiated Product: Different location, atmosphere, quality of food, service among other things. Advertising marketing, survive, quality. ----Easy entry and exit the market EX: retail firms, grocery stores, gas stations. ---Resource misallocation: producers could produce more a product but that would drive down prices. The restrict output to increase prices. EX: retail trade, restaurants
Cartel
A group of firms that formally agree to reduce competition by coordinating the price and output of a product. These companies plan to coordinate the prices together. They will limit supply to drive prices up. Sometimes firms will cheat and increase their quota to make more money
Oligopoly
A market structure characterized by few large sellers, either homogenous or differentiated product, and difficult entry into the market.
Price leadership
A pricing strategy in which a dominant firm sets the price for an industry and the other firms follow. -Follow the leader One firm will set the price and other firms will follow Firms that are leaders: --Goodyear Tire and Rubber --DuPont (nylon) --Alcoa (aluminum)
Price taker
A seller that has no control over the price of a product it sells
Dominant strategy
A strategy that will benefit a player the most, regardless of which strategy his opponent chooses.
total cost
ATC X Q
ETF
Exchange traded funds (bunch of stocks put together) Safer way to play the market.
When do you want to shut down production in a competitive market?
If MR falls below AVC than STOP PRODUCING (ONLY REASON TO STOP PRODUCING) Why? If the price drops below the average variable cost, the firm is unable to cover even the variable cost and can reduce the loss by shutting down and paying only the fixed costs. (don't dig your grave deeper)
Nonprice competition
The situation in which a firm competes using advertising, packaging, product development, and difficult entry into the market. Capture business away with better advertisement. EX: cigarettes, soft drinks, ---Develop new products or improve existing ones. ---Do this because they know price matches are easy. They need to be able to convince you to buy their product.
Perfect competition profit maximization point
Where a firm makes the most profit during a specific time. Profit is equal to total revenue minus total cost, so the profit-maximizing output level is where there is the greatest vertical distance between total revenue and total cost (on the different graph). Formula: MC = MR MR = marginal revenue (not total profit (excluding costs) MC = marginal cost Profit is equal to total revenue minus total cost, so the profit maximizing output level is where there is the greatest vertical distance between total revenue and total cost. At that point, the slope of the total revenue line is the same as the slope of the total cost curve. Note that since the price remains constant at each quantity, the total revenue line is a straight line with a slope that is equal to the price of the good. The slope of the total revenue is the marginal revenue and the slope of the total cost curve is the marginal cost. Since at the profit maximizing quantity the slopes of both curves will be the same, profits are maximized where marginal revenue equals marginal cost.
Perfect competition break even point
Where a industry is not making nor losing profit Formula TR (MR X quantity) = TC (MR = ATC) TR = total revenue TC = total cost
game theory
model of strategic moves and countermoves of rivals. Airlines will try to do this.(one airline sets a sale then causes another one to follow) -Rivals are mutually interdependent. -Sometimes there is an incentive to charge a lower price (sell more airline tickets) -Tit for tat = you do one thing I will follow later by one upping you to show you whose boss! -Often times you do not know what a competitor is going to do. -Tend to end up in lower right hand area (of table)
arbitrage
the purchase of securities in one market for immediate resale in another to profit from a price discrepancy (buying a product at a low price and selling it for more)
